Macau VIP fundamentals may deteriorate further: Daiwa

Dec 09, 2014 Newsdesk Latest News, Macau, Top of the deck  

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The persistence of some key pressures on the Macau gaming industry appear “more structural and longer term in nature than is widely appreciated,” Daiwa Securities Group Inc said in a report on Tuesday.

The brokerage cited examples of casinos tightening credit available to junket operators, saying it has contributed to lacklustre VIP run-rates since the end of the third quarter and to a number of junket room closures in recent months. Daiwa said it expects further closures at end-2014 and the first quarter of 2015.

“Our talks indicated that the sense of pessimism and segment pressures are likely to become longer-term issues,” Hong Kong-based analysts Jamie Soo and Adrian Chan wrote in the note, following a visit to Macau last week.

“A fundamental bottoming-out in the first quarter of 2015 is increasingly unlikely, in our view,” they added.

Macau’s gross gaming revenue (GGR) for November dropped 19.6 percent year-on-year to MOP24.27 billion (US$3.04 billion). It was the sixth consecutive month of declines judged against year prior periods.

There has been a contraction in VIP revenue seen in every month since June, linked by analysts to the continued bank credit decline and the corruption crackdown in mainland China.

Daiwa said industry participants expect VIP run-rates to see sequential deterioration in 2015.

“This is even worse than our much lower-than-consensus base case – we forecast run-rates to stabilise at near-third quarter 2014 levels, which translates into -19 percent year-on-year for 2015, while the market expects an 8 percent year-on-year decline,” Mr Soo and Mr Chan said.

The analysts also said discussions to potentially increase junket commissions in the Macau market “are under way”, warning that any steps taken to intensify competition “would likely be margin dilutive”.

In Tuesday’s note, Daiwa stated that the ban on phone betting by some Macau casino operators is influencing market share.

In October, GGRAsia reported that Sands China Ltd had told its junket partners that proxy betting would no longer be allowed in its Macau casinos.

“Since the ban on phone betting was implemented by some casino operators in late October, our market research indicates that the operators that continue to permit it have seen a big rise in phone betting,” said the Daiwa team.

“We have seen a shift in VIP market share away from the operators that have banned this activity. This is likely to influence VIP market share going forward,” they added.

In a previous report, Mr Soo and Mr Chan had said that phone betting could account “for around 8 percent of annual VIP betting revenue in Macau”.

The brokerage also expects a structural slowdown in the mass market. Prior to October, the mass market was still expanding year-on-year, albeit at a slower rate than in 2013. October’s mass play weakness seems to have extended to November, according to investment analysts.

Following the clampdown on illegal UnionPay terminals, “we have heard it is increasingly cumbersome and costly to service capital in/outflows between China and Macau,” said the Daiwa analysts.

“Second, casino operators seem disinclined to close down nonperforming junkets (thereby cutting a guaranteed, albeit smaller, revenue stream), preferring to reduce per-junket table count,” they added.

“This strategy, coupled with sequential declines in mass table yields, is a good indicator of the expected softening in demand.”

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